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Paying for the Buyout

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how can a firm or remaining owners afford to buy out an exiting owner of a deceased owner’s estate? Stuart Mickelberg replies:

In the event of death or disability of an owner, a practical method of funding the buyout is through life or disability insurance policies. When an owner dies or becomes disabled, the policy benefit is used to buy the stock from the selling owner or the estate. Generally, the insurance premium payments are not deductible, and the insurance proceeds are not taxable. When funding a buyout resulting from a triggering event other than death or disability, the required cash must come from the remaining owner’s personal assets, company cash reserves, or loan proceeds. Otherwise, the buy-sell agreement needs to provide for the remaining owners to purchase the stock under a promissory installment note. The terms of the promissory installment note needs to be incorporated into the buy-sell agreement and negotiated prior to the execution of that agreement. The idea here is that the buyer funds the installment note obligations from the successful business operations so that outside financing is unnecessary.